They're playing a dangerous game of chicken on a fiscal cliff

Friday, November 30, 2012

WASHINGTON -- Before the fiscal cliff comes the political roller coaster. Agreement will seem unattainable until, suddenly, it isnít. The sickening plunge will feel endless until the car starts to climb again. But at the moment, things are not looking good.

The public talk from Republicans has been heartening, certainly. They have offered not only soothing words about compromise but also explicit acknowledgement that revenue must be on the table. The no-new-taxes pledge has lost its punch. As Joe Biden would say, this is a big deal, folks.

The problem is that the behind-the-scenes deal-making has been way more disappointing than the public posturing. After the kumbaya White House meeting last Friday with congressional leaders, it took until the following Monday evening for Republicans to return to the White House with an initial offer.

It was, in a word, pathetic.

As described to me by several sources with direct knowledge, the ďbargainĒ was that all the Bush tax cuts would be extended. Revenue would be raised through later tax reform -- although no amount was specified and, as important, no trigger mechanism put in place to enforce the deal. In return for the vague promise of future revenue, the defense spending sequester would be canceled, the age for Medicare eligibility would rise and changes would be made to the formula for calculating increases in Social Security benefits. Cuts now, revenue later. Sound familiar?

Oh, and by the way, that increase in the debt ceiling? Republicans want to address that separately, a key issue for the administration.

Even as an opening bid, this offer is dishearteningly low-ball and insincere. It does not bode well for crafting a deal by year-end. A reasonable offer would contain, at the very least, a revenue number, an enforcement mechanism and a debt limit increase.

The White House has an important responsibility here too. In his meeting with the leaders, the president emphasized his willingness to tackle entitlement reform. He said he was braced for, and willing to take on, blow-back from liberals in his party and outside groups.

In previous negotiations, the president was willing to raise the Medicare eligibility age, change the formula for calculating Social Security increases and cut Medicaid. Intervening events changed the calculus. The election strengthened his bargaining position. The Supreme Courtís health care ruling, making the Medicaid expansion optional for states, further complicated matters. Raising the Medicare age becomes harder if lower-income seniors arenít eligible for Medicaid. Cutting Medicaid is more difficult when the administration wants to entice states to participate.

But as the president has long recognized, entitlement reform is essential -- to the politics of crafting a bargain and the substance of achieving fiscal stability. So what, exactly, does he propose? Republicans canít take the tax plunge if Democrats arenít willing to give on entitlements -- not later, but simultaneously.

Another cause for pessimism is the willingness of extremes on both sides to engage in cliff-jumping. From the right, the theory is that automatic cuts are better than no cuts at all, and that Republicans would get to blame Democrats for raising taxes and imperiling national security.

From the left, the theory is that time is on their side, that with the scheduled expiration of the Bush tax cuts comes leverage and, absent any action, trillions in new revenue. The left has a mirror-image assessment of the blame game: that Republicans will pay the price for holding tax cuts for nearly everyone hostage to tax cuts for the 2 percent.

All this makes for an especially dangerous game of fiscal chicken. And what begins as tactical bravado can easily edge into unintended stalemate.

A few weeks past the cliff would be extremely messy but not necessarily disastrous. People could wait to file their 2012 tax returns until the Alternative Minimum Tax is patched. Medicare could hold off on reimbursements until rates are increased. Government agencies could postpone cuts.

The threat of delay is twofold: that the protracted resolution will further depress investorsí confidence in the capacity of the government to manage its affairs, and that the standoff could drag on. It will be difficult for a newly constituted Congress -- one scarcely scheduled to be in session -- to resolve this question in the first few weeks of January. A resolution by, say, the beginning of February might avert a recession but still take a big toll on growth.

For a meaningful deal to be reached, more groundwork should have been laid by now. Tick, tick, tick.